How does a bridging loan work, and what should the borrower be worried about? People are often told to check the interest rate on a bridging loan. Depending on the type of charge, the rate can range from 0.95 percent on the first charge to 1.75 percent on the second charge and/or blended rate. Since Mday (October 31, 2004) in the UK and with the help of the FSA, all charges will be clearly shown in a KFI (Key Features Illustration). There will definitely be an arrangement fee, which could be anywhere from 1% to 1.5% of the loan amount. However, the consumer must be told about any "exit" fees. Consumers and homeowners also often forget that there needs to be a clear way to get out of the agreement, which is a must.
Closed bridging finance is available to homeowners who have already exchanged on the property they want to buy. If the closing takes longer than expected, the homeowner has the peace of mind of knowing that their property will sell, or an exit route.
Open bridging finance is much riskier for the homeowner and shouldn't be done without a lot of thought. This type of bridging is usually used by people who have found their dream home but can't sell it right away or haven't found a buyer. Most of the time, open bridging would cost 1 percent more than closed bridging, which shows the higher risk. As part of their underwriting process, lenders will also make sure that the security property has a lot of equity in it. The lender would also want to see a mortgage offer and proof that your current home is being actively marketed.
Even though open bridging is a bit risky, there are many good things about bridging finance. Most of the time, there would be no valuation or legal fees, since most legal work is done "in house." With consumers getting more involved in residential and commercial property auctions, bridging loans are also a good way to buy a property at an auction. The exchange would happen when the hammer fell, and it would take about 20 working days to finish the deal.
When you look at the bigger picture, bridging loans offer more than just property. For example, they can "buy out" a bankruptcy, which can save a person's home and business and improve cash flow. This is also a great alternative to an Individual Voluntary Arrangement (IVA), which messes up a person's credit record for a long time. Also, the fees for an I.V.A. can be very high and are usually not a good idea unless you have a lot of creditors.
Bridging finance can also help with buy-to-let investments and projects to build your own home. A 100% retention could be put on a buy-to-let property if it is unlivable or doesn't have a bathroom or toilet. With self-build or development projects, the money is given out in stages. An architect chosen by the lender signs off on each stage before the money is given out.
Other times, the trustee of a deceased person's estate might not be able to get probate because taxes haven't been paid. Bridging is the solution if there isn't enough cash in the estate and the property can't be sold. Even if the homeowner has been given the judgement, repossessions can still be stopped. People often think that once they have been kicked out of their home, they will never be able to go back. This is not true, because anyone with a mortgage will want to get their money back as soon as possible, without all the trouble of advertising. Use the bridging loan calculator at http://www.mortgage-loan-uk.net/bridging loan calculator.htm to figure out how much you will pay each month for a first, second, or blended rate on a bridging loan.
